Fix and Flip: Estimating Rehab Costs and Profit

fix-and-flip loan

fix-and-flip loanSavvy investors focused on fix-and-flip properties know that estimating rehab costs is perhaps the most critical and challenging part of the deal. If your estimate to fix-and-flip the property is too high, you will likely lose the deal to another investor. If you underestimate, your potential profit will adversely be affected.

The better you assess rehab costs, the more successful you will be. Let us look at some key aspects to consider as you estimate rehab costs that will help ensure a strong ROI:

  • Know your buyer and neighborhood: Study the comparables – recently sold properties in the neighborhood similar to the property you are interested in – so you have a clear idea for how much you should be able to sell the house. If the property is in an upmarket neighborhood, potential buyers will want higher end rehabs. If it is in a med-low income neighborhood, you will need to spend less on the total project.
  • Spend time in the property and note problems: With an idea of how you want the property to look post flip, have a checklist in hand as you walk through the home. Take notes of all issues or problems with the home that you will want to address. If you need help, take your contractor with you. Taking photos and videos is also a great tip.
  • Begin your estimate: Sort your check list into categories (Exterior, Foundation, Interior, etc) and include other line items such as contractors. Either from experience, with the aid of a contractor, or by searching the web, assign costs to the items in each category so you come up with total costs for each category. Now you know your estimated rehab cost.

It is important to never lose sight of your after-repair value (ARV), the value of the home post fix. Your ARV will not only help you determine your rehab budget, but also how much you are willing to pay initially for the property. Most experts agree that to profit from the project, you should bid no more than 70% of the price for which you believe you can sell the property. But remember to factor in what it will cost you to fix up the property.

There is no doubt there is much money to be made in the fix-and-flip market. And lots of factors will determine whether or not you are successful. Contact the RLG team today to schedule some time to discuss how RLG’s vast experience in the sector can help guide you to success.

Fix-and-Flip Loans

Fix-and-Flip Loans

fix-and-flip loanFlipping property is all the rage with both individual and institutional investors. Turn on any home or DIY network or browse social media platforms and you will undoubtedly find thousands of folks showcasing their home flips. In order to carry out these flips, many of them take advantage of fix-and-flip loans, which are residential loans used by short-term real estate investors to purchase and renovate a property before flipping it for a profit. These loans bridge the gap between the investor’s capital and the property’s purchase price and renovation costs. These loans are generally repaid with proceeds from the final property sale.

In many cases, the investor purchases the property through a foreclosure or bank short sale or even at auction. The buyer will then decide what type of renovation project to undertake. The most common projects include:

  • Purchase: Buy the home, make minor renovations, and return it to market
  • Renovate: Buy the home, make updates, such as painting inside and out, a new master bath, new carpet, or new appliances, before returning it to market
  • Build: Buy the home, completely replace it with new construction, and return it to market

Let us take a brief look at the two most popular types of fix-and-flip loans:

  1. Hard Money Loan – A short term privately funded loan secured solely by the real estate asset’s value that investors use to purchase and renovate a property.
  2. Bridge Loan – A temporary loan used to cover the time between two real estate transactions, allowing investors to purchase their next flip property without having a contingency to sell the other property first.

There are other financing options for investors looking to fix and flip homes. Some of them include fix-and-flip cash-out refinance, equity line of credit, and investment property line of credit. Speak with your mortgage professional to find out what is best for your endeavors.

And finally, it bears mentioning the 70 Rule – or 70% Rule. When determining the most you should consider paying for a property, the 70% Rule dictates that you should pay no more than 70% of the property’s after repair value minus repair costs.

If you are interested in a Fix-and-Flip loan or would like more information about how to jumpstart your property investment business, contact the professionals at RLG today.